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Philip Falcone’s Harbinger Capital Partners sued Dish Network Chairman Charles Ergen this afternoon seeking more than $2 billion in punitive and compensatory damages for an alleged fraudulent scheme to assume control of LightSquared and its valuable wireless spectrum.

Harbinger’s suit reiterates many of the accusations it has made in LightSquared’s bankruptcy court proceedings in recent weeks. Judge Shelley Chapman told LightSquared’s lawyers on July 23 that the company must decide sooner rather than later whether it would pursue litigation against Ergen, though she acknowledged the decision could be a difficult one. Noting the $2.22 billion stalking-horse bid for LightSquared’s spectrum offered by L-Bank Acquisition Co., an entity controlled by Ergen, Chapman said: “Ergen has made a substantial bid, so it’s not an easy decision, but it’s something the debtor needs to decide and it’s not a can we can kick down the road.”

In its suit, Harbinger called the L-Band offer a “low-ball” bid that, when leaked to the press earlier this year, did little more than sow “confusion and doubt” among investors.

Secret purchases

Ergen fraudulently infiltrated the senior-most tranche of LightSquared’s capital structure, secretly amassing more than $1 billion of secured debt in spite of a credit agreement explicitly designed to protect LightSquared and Harbinger from interference by competitors like Dish and EchoStar, the suit claims. Over the course of a year, an Ergen investment vehicle known as Sound Point made its purchases, “often at significant discounts to par,” becoming LightSquared’s largest creditor.

“By the time Sound Point’s true identity was revealed, it had already contracted to purchase enough loan debt to severely impair Harbinger’s rights in LightSquared’s bankruptcy proceeding, and thereby to block Harbinger’s efforts to negotiate a consensual plan of reorganization,” according to the suit.

Harbinger also accused Ergen of disrupting efforts to negotiate with LightSquared’s lenders by entering into binding commitments to purchase hundreds of millions of dollars of loan debt, then refusing to settle those trades over the course of several months, running down the clock on LightSquared’s exclusive right to file a reorganization plan.

“Ergen deliberately kept these trades open in order to prevent Harbinger from raising the capital it needed for Harbinger to cash out all of LightSquared’s creditors and preserve its controlling equity interest – a scheme that successfully and tortiously interfered with Harbinger’s prospective economic advantage,” the suit says. “As a result, although Harbinger has access to the capital markets for a LightSquared-related capital raise, that access is no longer at the level available before Ergen began his misdeeds.”

Even as his financial stake in the company was revealed, Ergen joined the ad hoc group of secured lenders in LightSquared’s bankruptcy and leveraged his control to “scuttle” all negotiations between LightSquared and its creditors, and to file a proposed reorganization plan that would leave Harbinger – which owns more than 82% of the company’s equity – empty-handed, the suit says.

At LightSquared’s most recent court hearing, Judge Chapman set a disclosure statement hearing for Sept. 30 and a confirmation hearing, which is expected to last several days, for Dec. 10. She also scheduled a Sept. 24 hearing on approval of bidding procedures in connection with the potential sale of the company or its assets, and an auction for Dec. 6. – John Bringardner

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